Up in the air

Our national carrier is likely to be all smiles over the next few weeks. But is that enough?

This magazine has published a fair share of criticism of Air Canada over the years: about its tattered brand image, its poor service and its business model, which even CEO Robert Milton acknowledged was “broken” when he led the company–nearly $13 billion in the hole–into bankruptcy protection some 18 months ago. On the other hand, I'm the first to acknowledge when it seems that people are at least trying to do better. I flew Air Canada to Calgary recently, and I am happy to report that it was not an altogether unpleasant experience. The planes were on time, and I thought I caught one of the flight attendants smiling–more than once.

Could Air Canada truly be mending its money- and customer-losing ways? The next few weeks will bring lots of optimistic talk from the head offices of our national carrier–it emerges from protection from its creditors on Sept. 30, and its new parent company, ACE Aviation, will begin trading on the TSX on Oct. 4. But one good experience does not a new airline make; neither does an equity issue under a clever corporate moniker. And while Milton has been sanguine about the future, it is far from certain–even after shedding close to 7,000 jobs and reducing debt to a mere handful of billions–that the way ahead for Air Canada is clear.

The first reason for skepticism is the state of the airline business worldwide, especially in the United States. Figures from the U.S. Air Transport Association show that revenue per seat industry-wide is dropping, owing to fare promotions, excess capacity and discount carriers who continue to eat the lunch of traditional airlines. This summer's hurricanes in the Southeast surely won't help. Add in travellers' jitters over the threat of terrorism and factor in fuel prices that show few signs of coming down and you've got a global industry that doesn't have much going for it.

Now consider history. Few other industries–maybe none–have been as good at losing money and destroying shareholder value as airlines. That's not just a function of perennial mismanagement (though it doesn't hurt). The fact is, the customer has changed. Jet travel used to have cachet–sophistication, speed and luxury all in one expensive experience. These days, it's barely a notch up from taking the bus. Most people will fly on whatever's cheapest, and who can blame them?

What killed the old Air Canada was this long-term commoditization of air travel. With its high costs, it simply couldn't compete with carriers like WestJet as prices fell. Maybe now Air Canada has costs under control (although WestJet claims its own will still be substantially lower). But growth will be a real challenge–over the long term, as much to the discounters that have kicked Air Canada's butt as it is to Air Canada.

Finally, one should never underestimate an airline's ability to snatch a debacle from the jaws of an apparent victory. Recall the proud talk around Air Canada's absorption of Canadian Airlines a few years ago. Or consider recent history, namely the US Airways saga: it filed for bankruptcy protection in mid-September–just 18 months after it emerged from bankruptcy protection. That suggests a model for airlines that, if not rosy, at least seems plausible: operate in the red, pile up debt, get protection from creditors, then start the cycle again. True, it would be an abuse of bankruptcy laws, shareholders and creditors, but at least it would keep a failed business model flying for a little while longer.